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Interactive Brokers - Europe: The Week Ahead (May 13-17)


Croatian Inflation and Central Bank Accommodation

Investors in the week ahead will receive an update on Croatia’s stubbornly subdued rate of inflation, amid continued accommodation by the country’s central bank.

Market participants are set to get a fresh gauge of consumer prices for April after the pace picked up somewhat in the previous month.

Croatia’s consumer price index (CPI) ticked-up by 1.0% in March from the prior month and rose 0.9% over the prior year.

 

  Wednesday, May 15

  • CPI (Apr)

 

 

While consumers in Croatia were generally faced with increased clothing costs in March from the prior month, prices of household equipment and furnishings mainly helped to contain the headline inflation figure.

According to the Croatian National Bank (CNB, Hrvatska Narodna Banka) monthly economic activity indicators suggest that real GDP grew in early 2019, following a stagnation at the end of the previous year.

Annual consumer price inflation picked up from 0.2% in January to 0.5% in February, mostly on the back of higher energy prices.

The CNB also observed that price movements in early 2019 “show that the reduction in taxes on some products (fresh meat, fish, eggs, fruit, vegetables, over-the-counter medicines and diapers) pushed prices down more than anticipated.” The central bank said it therefore thinks the average level of prices in 2019 may be lower than previously expected, which may “give a boost to domestic consumption.”

 

Broader growth picture

Against this backdrop, the CNB said it “continued to pursue an expansionary monetary policy, maintaining very high levels of liquidity in the domestic financial market,” which helped annual corporate and household lending growth to accelerate “slightly.”

However, in the broader economic picture, Croatia’s growth is likely to be hampered by a slowing global economy, with decelerated growth rates expected in its main trading partners, including Italy and Germany.

 

 

The International Monetary Fund (IMF) earlier in May wrapped-up a seven-day, macroeconomic and policy development study in Zagreb and, among its conclusions, found that in Croatia, growth is “gradually moderating from its recent highs, inflation remains subdued, international reserves have increased, and public debt has been declining.”

IMF advisor Srikant Seshadri, who led the assessment, said that Croatia’s fiscal performance has been “strong,” while private demand and “tourism continue supporting economic activity, which is also underpinned by the CNB’s continued accommodative monetary policy.

“Overall, the banking sector is liquid, profitable, and well-capitalized.”

Seshadri added that “a possible slowdown in main trading partners may affect these benign conditions. “If a slowdown were to emanate from Europe, the authorities are encouraged to let the social safety net work, before considering fiscal stimulus.”

 

Checkered economic past

Croatia suffered through a six-year long recession, which ended around 2015, when real GDP growth picked-up. Since then, the rate has been running at an average of close to 3.0%, underscored by strength in domestic consumption and investment.

Moody’s Investors Service, which recently upgraded its outlook on the ‘Ba2’-rated country to positive from stable, said it anticipates positive economic growth to continue in the coming years, although GDP growth is likely set to decelerate somewhat against the backdrop of a “more challenging” international environment.

Moody’s thinks Croatia’s real GDP growth will reach 2.4% on average in 2019-2020, and “should support the country's efforts to reduce public indebtedness looking ahead.”

Moody’s analyst Olivier Chemla noted that the ‘Ba2’ sovereign, junk status, credit rating reflects the nation’s relatively high per capita income, while institutions benefit from EU membership and the “strong commitment” of the CNB towards achieving kuna/euro stability.

The value of Croatia’s local currency has fallen by roughly 7.12% against the U.S. dollar from May 11, 2018 to April 25, 2019 and has languished at around the 0.1510 level, according to Bloomberg. When paired with the euro, the kuna has shed less than 0.9% over about the same period and was last trading near to its 52-week average of 0.1350.

Chemla continued that Croatia still faces “significant challenges that weigh” on its growth prospects, despite stronger fundamentals than prior to its recession. These challenges emanate in part from the country’s small-sized economy, as well as its low potential growth relative to peers.

 

Credit strength

To date, uncertainties over Croatia’s creditworthiness appear to have provided frontier market investors with some amount of ease.

Five-year credit default swap spreads (CDS) on Croatia, for example, have tightened by around 23 basis points over the past three months to just north of 96bps, while other frontier market countries such as Serbia and Romania, rated ‘Ba3’ and ‘Baa3’ by Moody’s, respectively, have widened 3bps and narrowed 16bps over the same timeframe to 110bps and 95.5bps, respectively.

Investors will likely be eyeing Croatia’s inflation rate, real GDP growth, as well as economic conditions in Germany, Italy and other key trading partners, for signs of weakness in the country’s overall health.

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

 

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The author does not hold any positions in the financial instruments referenced in the materials provided.

There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.

Trading on margin is only for sophisticated investors with high risk tolerance. You may lose more than your initial investment.

Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


23892




Forex

BlackRock - Why we see a renewed spring in Europe's step - By Elga Bartsch


Elga explains the reasons we see a European economic recovery in the second half of the year – including an easing of financial conditions, Chinese stimulus and solid domestic demand.

Europe is still holding back global growth, having been a key support in prior years. Yet much of the eurozone weakness can be attributed to the fading support from export demand as world trade nosedived. As the most open G3 economy, Europe suffered more greatly.

In the coming months, we expect Europe to gradually move out of its tricky spot, as we write in our Macro and market perspectives A renewed spring in Europe’s step. This view assumes that the UK’s dragged-out Brexit debate doesn’t morph into a disruptive exit and rising US-EU trade tensions don’t shock confidence.

The U.S. slapping tariffs on European products–whether autos or other–should have only a moderate direct economic impact. Unless it sparks a broader confidence shock, this shouldn’t disrupt the solid domestic economic picture. And so, we expect the upbeat domestic trend to reassert itself once global trade starts to normalize and idiosyncratic setbacks–such as auto production–and sector bottlenecks fade.

Eurozone growth is supported by accommodative monetary policy, a more expansionary fiscal policy stance, higher than normal capacity utilization rates and labor markets approaching full employment. Our financial conditions indicator (FCI) shows that eurozone conditions have eased significantly in the first part of 2019 – an improvement that is on par with the one seen in early 2016. For that reason, we expect GDP growth to pick up and move slightly above trend levels (around 1.25%) in the second half of this year.

What underpins our call for a recovery?

A rebound in the FCI, Chinese stimulus and fading headwinds. Half of the nearly 80 eurozone activity indicators, summarized in our eurozone Growth GPS nowcast, are starting to show meaningful improvement.

Industrial data for the start of the year are still poor. Germany–where factory orders plunged in February–remains the weakest link. But other data–especially for the services sector–are holding up or starting to recover. And incoming information on near-term growth tentatively suggests building momentum at the start of the second quarter. Our eurozone Growth GPS started to stabilize in mid-March, indicating that the consensus expectations for eurozone GDP over the next 12 months are close to bottoming out. See the Reading the recovery chart.

The GDP outlook downgrades that began at the start of 2018 may have nearly run their course. Historically, our GPS signal has led consensus expectations by about three months (see our interactive macro dashboard for more detail). This suggests that investors still have some time to position themselves for potential outlook upgrades.

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Investing involves risks, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

International investing involves special risks including, but not limited to currency fluctuations, illiquidity and volatility. These risks may be heightened for investments in emerging markets.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of February 2019 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

©2019 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

BIIM0519U-836462-1/1

There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from BlackRock and is being posted with BlackRock’s permission. The views expressed in this material are solely those of the author and/or BlackRock and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


23811




Forex

Interactive Brokers - Asia-Pacific: The Week Ahead (May 6-10)


New Zealand: RBNZ Rate Decision Eyed As Inflation Expectations Sputter

Market participants in the week ahead will receive further insights into New Zealand’s economy, including updates on inflation measures, as well as a rate decision from its central bank.

The week gets underway Monday with a gauge of business expectations for second quarter of 2019 inflation, after sentiment in the first three months of the year cooled.

According to the Reserve Bank of New Zealand’s (RBNZ) most recent quarterly Survey of Expectations of businesses, inflation expectations for one year ahead diminished in Q1’19 to 1.82% from 2.09% in the prior quarter, while the two-year outlook remained steady at 2.02% vs 2.03% previously.

Monday, May 6

  • Inflation Expectations (Q2)

Notably, house price inflation expectations fell from 2.86% to 1.91% over a one-year, and from 2.31% to 2.14% over a two-year time horizon.

Against this backdrop, New Zealand businesses expect GDP to grow at a 2.38% and 2.36% rate for one and two years ahead, respectively.

Meanwhile, the RBNZ has maintained its Official Cash Rate (OCR) at 1.75%, where it has resided since November 2016.

Tuesday, May 7

  • RBNZ - OCR Decision & Monetary Policy Statement

The RBNZ assumed a more dovish tone at its latest monetary policy meeting in late March, when it noted that given the “weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down.”

While the central bank observed that the country’s employment figures have neared its maximum sustainable level, core consumer price inflation has stayed under its 2% target, “necessitating continued supportive monetary policy.”

The RBNZ added that the balance of risks to its outlook has shifted to the downside, amid a weaker global economic outlook that has affected some of the nation’s key trading partners, including Australia, Europe, and China.

In fact, the weaker outlook has prompted several global central banks to ease their expected monetary policy stances, placing upward pressure on the New Zealand dollar.

Forex

In the Q1’19 RBNZ Survey of Expectations, businesses generally anticipate the New Zealand dollar and U.S. dollar exchange to dip from 0.677 in late January to 0.67 at the end of June 2019, and 0.66 at the end of December 2019.

The New Zealand /Australia dollar exchange rate is expected to fall from 0.950 in late January to 0.94 at the end of June 2019 and further decrease to 0.92 at the end of December 2019.

Credit Profile

Moody's Investors Service, which has assigned its pristine ‘Aaa’ sovereign credit rating on New Zealand, recently noted that the country’s “very strong” credit profile enables it to “mitigate external and domestic vulnerabilities related to the economy's high reliance on external financing and its elevated level of household debt.”

Moody’s analyst Matthew Circosta said while “the potential for further trade restrictive policies around the world remains a threat to export growth,” relatively “inelastic global demand for the country's food exports, in particular high-quality dairy products, mitigates this risk relative to other Asia-Pacific economies.”

However, he added that business confidence weakness “remains a risk to investment and hiring.”

Elsewhere, investors in the latter part of the week are also set to receive April’s retail card spending numbers, and over the weekend, they will get further inflation color from New Zealand’s food prices.

Thursday, May 9

  • Retail Card Spending (Apr)

Sunday, May 12

  • Food Inflation (Apr)

New Zealand's food price index (FPI), which measures the changes in prices that households pay for food, rose 0.5% in March from the prior month, highlighted by higher costs for fruit and vegetables (+3.7% m/m) and meat, poultry, and fish (+1.3% m/m).

On a year-over-year basis, the FPI increased 1.2% over March 2018, underscored by a 2.1% climb in non-alcoholic beverage prices and a 1.4% rise in grocery food costs.

While the rise in food prices may have been a burden to households, they could have helped some New Zealand stocks.

Stocks & ETFs

Certain of the country’s equities – as evidenced by the iShares MSCI New Zealand ETF (NASDAQ: ENZL), which has as its top holding a2 Milk Company (OTCMKTS: ACOPF) – have climbed roughly 19.53% from their most recent 52-week low set in late October 2018.

Indeed, a2’s interim results for the half-year ended December 2018 shows a 41% year-on-year surge in total revenue to just north of NZ$613m, while EBITDA soared 52.7%, and after-tax net profits jumped over 55%. The company earned 20.9 cents per share over this period, a rise of nearly 53% from the prior year.

A2 said that it “invested strongly” in the first half of the year in both internal and external capability “to better understand” its Chinese consumers, as well as channel dynamics and ways of improving brand awareness.

After a “very strong first half performance, and encouraged by growing market share in China,” a2 added that it is “now in a position to reinvest the benefits of scale into increased marketing activities in the second half.”

The firm’s stock has skyrocketed more than 85% from its latest 52-week low set in October 2018. It was last trading at around NZ$15.43 intraday Wednesday on the Australian Securities Exchange, according to the IBKR Trader Workstation.

Market participants will likely be paying close attention to the RBNZ’s rate decision for any signs of a further dovish tilt, as well as the unfolding of U.S.-China trade talks, Brexit, domestic household consumption and inflation for additional insights into the country’s general economic and financial well-being.

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

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The author does not hold any positions in the financial instruments referenced in the materials provided.

There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.

Trading on margin is only for sophisticated investors with high risk tolerance. You may lose more than your initial investment.

Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


23784




Forex

Interactive Brokers - Europe: The Week Ahead (Apr 29-May 3)


No Signs of a Rotten State in Denmark 

Investors in the week ahead are set to receive updates on Denmark’s economic health, including fresh manufacturing and unemployment figures.

While Denmark continues to contend with global growth concerns and geopolitical headwinds, the country has experienced expansionary financial conditions, amid ultra-low interest rates and contained credit balances.

Yields on two-year and five-year Danish government debt resided in negative territory intraday Thursday, with the 10-year note at 0.07% – up from its latest 52-week low of around -0.026% set in late March 2019.

Danmarks Nationalbank – Denmark’s central bank – recently observed that the country’s economy has been in “a balanced upswing for the sixth year in a row,” as growth continued in the second half of 2018, marked by a 2.2% GDP growth rate over the last four quarters.   

The central bank estimates that the Danish economy will continue to expand, but at a more moderate pace, with GDP expected to run at 1.7% in 2019 and 2020 and 1.6% in 2021 – driven in large part by private consumption, exports and investments.

In fact, a weakened Danish krone has heled keep the nation’s exports competitive. The country’s local currency has shed more than 9.0% of its value year-on-year against the U.S. dollar.

 

 

Danish resilience

Danmarks Nationalbank said that while the recent slowdown in world trade and prospects of lower growth in the euro area have led to “a small downward adjustment of market growth in Denmark’s export markets,” Danish firms remain well-equipped to meet demand.

While other headwinds to global growth, including U.S.-China and other cross-border trade conflicts, as well as the UK’s path to exiting the EU, pose downside risks to Denmark’s economy, these challenges will likely impact the country only modestly.

Still, parts of the nation remain vulnerable to certain external shocks.

Analysts at the Organization for Economic Co-operation and Development (OECD), for example, highlighted that Denmark’s “small open economy” is “particularly exposed to an escalation of import tariff increases and retaliatory measures from affected countries.”

Certain sectors of the country’s economy may also undergo significant adverse impacts from a hard Brexit, including spikes in trade and investment barriers between the EU and the UK, which “would have major negative economic effects” in its agricultural, food and manufacturing industries, as well as  its British-dependent fishery business, the OECD said.

On the domestic front, the organization added that an unexpected hike in interest rates “could trigger significant drops in house prices, especially in Copenhagen, resulting in insolvent households and increased losses in the financial system.”

Against the backdrop, market participants in the week ahead will receive updates on Denmark’s manufacturing and unemployment numbers, including DILF’s Manufacturing PMI for April.

 

  Monday, April 29

  • Manufacturing Industries, Tendency Survey (Apr)

 

Thursday, May 2

  • DILF Danish Manufacturing PMI (Apr)
  • Foreign Reserves (Apr)

 

The seasonally adjusted Danish PMI plunged to 56.1 in March from 61.9 in the prior month, underscored by declines in all sub-indices, except new orders.

 

 

Among other factors, production – one of the most important sub-indices, according to DILF – fell 7.8 percentage points month-over-month to 60.5, while employment plunged 17.7 points into a contractionary level of 46.0.

DILF attributed the massive decline in the labor market to a more than doubling of respondents who said they experienced less employment, while 69% of the surveyed population replied that their job situations were unchanged.

Market participants will also receive further color about Denmark’s unemployment rate ahead of the weekend.

 

Friday, May 3

  • Unemployment Rate (Mar)

 

Denmark’s central bank claims unemployment in the country amounts to just north of 100,000 persons, or 3.7% of the labor force.

The Nationalbank noted that the level of unemployment has “not yet been pressed as far down as seen during the overheating in the 2000s, but it is still around 10,000 below the cyclically neutral level, which is estimated at around 115,000 persons.

“A substantial share of this number is temporary unemployment related to job changes.”

 

 

Overall, Denmark’s labor market appears on track to sustain its strength.

According to Fitch Ratings, the country’s gains from earlier labor market and pension reforms will likely continue to support its employment picture.

Since peaking at 7.9% in May 2012, the country’s unemployment rate has trended downwards, reaching 5.0% in January 2019.

The ratings agency noted that it anticipates employment growth will remain strong, likely coming-in above a five-year average rate of 1.1%. It added that combined with “positive real wage growth and fiscal measures boosting household incomes, strong private consumption growth” is expected to persist, while still highly accommodative financing conditions should support investment.

Fitch, which has assigned its pristine ‘AAA’ sovereign credit rating to Denmark, characterizes the country’s economic landscape as “wealthy” and “high-value-added,” buttressed by “strong institutions and a track record of sound macroeconomic and fiscal policy,” while the potential for “a macro-financial shock, which would be amplified by high levels of household indebtedness,” remain a remote risk.

Meanwhile, indicators of confidence have generally weakened both in Denmark, as well as abroad, over the last half year, which may signal a future slowdown in labor market improvement. 

 

Stocks turn south

Elsewhere, Danish equity markets appear to be on a downward path despite the country’s overall fundamental health, as well as accommodative monetary policies across several central banks, including the Bank of Japan, the European Central Bank and the U.S. Federal Reserve.

 


Danish stocks – as evidenced by the iShares MSCI Denmark ETF (EDEN), which has among its top holdings firms such as pharma giant Novo Nordisk (NYSE: NVO), Dankse Bank (OTCMKTS: DNKEY) and beer brewer Carlsberg (OTCMKTS: CABGY) – have fallen around by around 2.5% since Monday, April 15, including a further decline of 0.62% intraday Thursday.

The weakness offsets a more than 17.2% climb in the equities since its most recent 52-week low set on December 24, 2018, which nearly erased a 20.5% fall in the ETF over the mid-May to late December period.

Investors will likely be eyeing further developments in Denmark’s housing market, as well as international factors that have been spurring growth concerns, including the unfolding of U.S.-China trade talks and Brexit for additional insights into the country’s general economic and financial well-being.  

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

 

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The author does not hold any positions in the financial instruments referenced in the materials provided.

There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.

Trading on margin is only for sophisticated investors with high risk tolerance. You may lose more than your initial investment.

Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


23711




Forex

Interactive Brokers - Asia-Pacific: The Week Ahead (Apr 15-19)


Hong Kong Unemployment Remains Strong; Eyes on Debt and HKD

Hong Kong is set to release updated unemployment figures in the week ahead, as market participants continue to eye developments in the region’s debt and currency markets.

Labor market conditions in HK have been squarely in positive territory, underscored by the lowest rate of unemployment in at least 20 years. At 2.8%, HK has maintained the smallest jobless population since April 2018, with dramatic improvement from its two-decade peak of 8.5% reached in June 2003.

Investors will receive updated unemployment figures for March on Thursday, April 18, after the prior month held steady at the 2.8% rate.

 

Thursday, April 18

  • Unemployment Rate (Mar)

 

Meanwhile, recent U.S.-China trade tensions, as well as changes in central bank monetary policy strategies, have had many investors somewhat jittery about HK’s local currency and bond markets.

Indeed, for most of 2018, the U.S. Federal Reserve’s hikes in interest rates and quantitative tightening measures generally spurred capital outflows from emerging markets and hampered global debt performance. The effects were exacerbated by headwinds such as uncertainties over U.S.-China trade negotiations, coupled with slowing growth in China’s Mainland economy.

According to the Hong Kong Monetary Authority (HKMA), the total volume of HK dollar (HKD)-denominated debt issuance rose, mainly due to an uptick in exchange fund bills and notes, along with the government’s support of the bond market.

The HKMA noted that since the global financial crisis, “a massive amount of funds” have flowed into the Hong Kong dollar. However, in 2018, there were signs of capital outflows, notably in the second and third quarters – triggering higher HKD interest rates across the board, and an upward trend in the government bond yield curve, as the aggregate balance declined.

HKMA observed that the negative yield spread between U.S. Treasuries and Hong Kong government bonds narrowed, which lured more investors towards local currency debt.

During this time, HKD bond offerings shot higher for the 10th consecutive year to HKD 3.56trn, a rise of 6.6% over 2017, with local corporate debt market funding having boosted by 35% over the same period.

 

Looser U.S. central bank policy eases fears of outflows

Against this backdrop, investor sentiment in HK’s debt market is likely to improve, amid the U.S. Fed’s recent pullback from its tightening stance.

The Fed’s decisions to maintain the target range for the federal funds rate at 2.25-2.5%, with no plans in 2019 to hike interest rates further, as well as cease other quantitative tightening measures, including ending its US$4trn balance sheet shrinkage in September, had spurred a plunge in U.S. government bond yields and generally reignited interest in riskier assets.

For the week ended April 3, Thomson Reuters/Lipper U.S. Fund Flows reported a net inflow of roughly US$135m into emerging market equity funds, contributing to a whopping total of around US$18bn this year, while at the end of March, more than US$1bn worth of inflows reportedly made their way into EM debt funds year-to-date.

 

 

Hong Kong equities – as evidenced by the iShares MSCI Hong Kong ETF (NYSEARCA: EWH), which has among its top holdings life insurance giant AIA Group (OTCMKTS: AAGIY) and CK Hutchison (OTCMKTS: CKHUY) – have climbed almost 25% from their most recent 52-week low set in October 2018.

HKMA has been cautiously optimistic about the recent dovish tack at the U.S. Fed, and warns that uncertainties linger.

HKMA chief executive Norman Chan said that in the past few months, “the Fed has adopted a more moderate tone in its monetary policy stance.”

In the minutes to its monetary policy meeting in March, the Federal Reserve Open Market Committee – the Fed’s policymaking body – reiterated it will be “patient” as it determines what future adjustments to the target range for the federal funds rate may be appropriate – in light of global economic and financial developments and “muted inflation pressures.”

However, Chan recently pointed out that as interest rate differentials between HKD and the U.S. dollar remain, incentives continue for funds to flow from HK local currency to the USD.

He continued that the HKMA will continue to maintain HKD exchange rate stability, while uncertainties over U.S. central bank monetary policy linger over the global macro-economic and financial environment. Chan warned that the “public should stay vigilant to possible risks arising from market volatilities.”

By mid-March, the HKMA had intervened at least three times – to the tune of nearly HKD 7.5bn, or roughly US$1bn.

Forex fluctuations

Marc Chandler, chief market strategist at Bannockburn Global Forex, recently noted that the “intervention works because it reduces the liquidity for the Hong Kong dollar and pushes up interest rates.” However, he observed that it has been seen by the markets as “relatively modest and not aggressive enough to snug liquidity.” 

He continued that some market participants viewed the rally in Chinese mainland shares as “a cause of the Hong Kong dollar's woes, but interest rate differentials alone can explain its weakness.  

“Moreover, without having a view on the direction of Chinese stocks, HKMA will probably have to continue to show its hand.” 

The HKD has recently weakened against the USD after gaining ground from its lows in March of around 7.849930, according to the IBKR Trader Workstation. The USD-HKD pair had hit around 7.836760 on April 10, only to sink back to roughly 7.8437 in intraday trading Thursday.

 

Trade optimism boosts risk-taking tone

More positive rhetoric on the U.S.-China trade front has also lent support for increased optimism among risk-takers.

Deloitte’s China chief economist Sitao Xu recently said that the “likely resolution of U.S.-China trade talks has removed a major overhang for regional asset markets. As a result, much improved sentiment coupled with the U.S. Fed's much less hawkish stance have further fueled rallies in equity and property markets."

Xu added that such “a relatively favorable macro backdrop should bring social issues to the fore.

“The Hong Kong SAR government is still in a good fiscal position and is able to use fiscal levers to help SMEs and even jumpstart certain sectors like fintech."

Investors will likely be keeping an eye on any further fluctuations in HK’s debt and currency markets, amid further developments in U.S.-China trade, potential shifts in monetary policy, and other macro headwinds.

 

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

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